Introduction
Option pricing models are mathematical models used to calculate the theoretical value of options. These models help traders and investors determine fair prices for options contracts, considering factors such as the underlying asset price, strike price, time to expiration, volatility, and interest rates.
Black-Scholes Model
The Black-Scholes model is a widely used mathematical model for pricing European-style options. It assumes that the price of the underlying asset follows a geometric Brownian motion with constant volatility.
Monte Carlo Simulation
Monte Carlo simulation is a flexible numerical method that can be used to price various types of options. It involves simulating multiple random price paths for the underlying asset and averaging the option payoffs.
Binomial Model
The Binomial model is a simple discrete-time model for option pricing. It assumes that the price of the underlying asset can only move up or down by a certain amount in each time step, forming a binomial tree.
